BOOM Earnings review

Posted by downtowntrader | 3/02/2006 07:54:00 AM | 0 comments »

Here is another great analysis from BTUFF. This is his review of BOOM's earnings report and SNPE's filing. Be sure to read my regular post from last night. I will also try and post my thoughts on gold later today.

Estimates vs. Actuals for Q4 2005

Starting at the top, revenues for the quarter increased 16% year-over-year (“YoY”) and 14% sequentially to $22.167 million. While my estimates were a little low on the explosive division and high on the AMK division, the differences offset and my overall estimate was off by only $67k.

While I was happy to see explosive revenues increase 17% YoY, I was somewhat disappointed with the flat AMK revenue. Management attributed the flat revenue growth at AMK to late-stage design modifications on the GE H System. These design modifications were cited as the reason behind the lower sequential revenue growth for AMK in Q3 vs. Q2. In the Q3 press release, these modifications were said to have been resolved but it was not clear if they were resolved at the end of the year or at the time of the report, which was more than a month into the fourth quarter. As such, it is highly likely that the same design changes that management discussed in Q3 had a continued impact on Q4. I want to ask investors relations (“IR”) about the design changes but I think these types of delays are to be expected during the early stage of work on the H System. Depending on my conversation with IR, I will probably carry my estimate of $1.6 million in AMK revenue over to the next quarter. I would imagine that GE will assume the cost of the design changes but that’s another question for IR.

Pre-tax margins were slightly below my estimate of 23.19% but up from 21.39% last quarter and 14.61% in the year-ago quarter. The actual pre-tax margin was 22.64%. All margins (gross, operating and net) have been increasing over the past year, including this last quarter, as a result of BOOM’s high fixed cost structure and management’s effectiveness in controlling expenses despite the company’s rapid growth. With the combination of higher sales and increased margins, income before taxes increased 80% over the year-ago quarter.

Finally, my overestimate in pre-tax margin was offset by my overestimate in the tax rate. My tax rate was 35% based on management guidance but I did say I thought this number could come in lower. The actual tax rate was 34%. In the future, I will continue to use a tax range of 34% to 37% unless management guides otherwise.

So….putting it all in a blender, my overestimates and underestimates washed out to a difference of $25k between my net income estimate of $3.482 million ($.28/share) and actual net income $3.457 million ($.28/share). Actual earnings were up 51% YoY and 10% sequentially.

Notes from the Report

The financial performance of the quarter was very strong especially when compared to the year-ago quarter, which benefited from the Ravensthorpe contract and miscellaneous tax benefits that resulted in an extremely low average tax rate of just over 21%. Furthermore, the year-ago quarter was the first quarter that started to bear the fruits of management’s restructuring efforts. I was impressed that BOOM was able to increase net income 51% despite these factors.

Aside from the financial performance, there were a lot of positives that came out from the earning release. For starters, the explosive division’s backlog increased 23% sequentially to $42 million; thus, indicating that demand remains very strong and getting stronger. The increase came despite the completion of New Caledonia and a large portion of Kuwait. While the $7 million contract for North American attributed to some of the increase, this was easily offset by the completion of the other big contracts. Where did the increase in the backlog come from? How many orders were booked in Q4? And, what was the average booking size? All questions I have for IR.

A second positive I took from the report is the planned increases in capital spending, which now includes a “major” expansion to the explosive facility in Mt. Braddock, PA. Previously management announced an expansion to the AMK facility in connection with the announcement of the supply agreement with GE. I would have to believe that management would not be planning the expansion to the explosive facility if they didn’t have good visibility into the future and didn’t see demand improving significantly over the next couple of years.

The budget for the planned expansion is more than the investment on the original facility. As construction costs have risen since the 1999 construction of the original facility, I would guess that the expansion will increase the footprint by 75% or so (total guesstimate and I didn’t crunch any numbers to come up with this). Lessons learned from the construction of the original facility, will result in the construction of a more efficient plant that will in turn likely increase capacity somewhere around 100%. Wait…I haven’t mentioned the big kicker to this… expects to fund the capital expansion through operational cash flow.

That brings me to my final point. Management is confident enough in the future cash flow of the company that they not only expect to fund the proposed capital expansion with cash but also feel comfortable enough to increase the dividend by 50% to $.15/share. The .4% dividend yield isn’t huge but does make the stock a little more attractive.

What Management Didn’t Say

One thing that wasn’t discussed in the earnings reports was the moderation of growth. Aside from the fact that it was already mentioned in the Q3 report, management likely didn’t say anything about moderation in growth because the coming quarter will show an increase in net income that once again hits triple digits. My expectation for triple digit growth in Q1 is based on my preliminary Q1 financial model and does not include the land put that should add about .12 to .13 to net income.

SNPE (Thanks to Smorg for brainstorming with me on the pros and cons of this)

SNPE is a French chemical company that owns just over 50% of BOOMs outstanding shares. SNPE acquired its position in BOOM through a combination of a stock purchase agreement, a conversion on its convertible debt holdings, and a private offering.

Mid-day yesterday, SNPE filed a 13D indicating that they were exploring the sale of up to all its shares (5,927,000 or 50% of total outstanding shares) in a secondary offering. Before we go any further, let me say that this is not a dilutive transaction because the shares held by SNPE are already outstanding. Furthermore, this is an SNPE transaction and BOOM will not directly incur any related expenses. I like the transaction because it will result in a road show that will increase BOOM’s exposure to the market, give management the opportunity to replace SNPE board members with new members, and bring control out of France and the French government and back to the US.

If SNPE relinquishes it shares to a number of investors, shareholders will have more control over the company. Greater shareholder control will make BOOM more attractive, especially to institutions. The lack of a controlling holder will also afford management the freedom to focus more on what is best for BOOM and on how to create shareholder value.

In addition to institutions, an offering to a number of investors may attract investment interest from customers (i.e. GE) and other corporations that see synergistic opportunities with BOOM. So long as these customers or companies are not taking a majority interest, this type of investor could be beneficial to BOOM by the way of contracts and supply agreements.

If SNPE was to sell all its shares to a single investor, that investor would be acquiring a controlling share and would likely be willing to pay a premium for the controlling share. While a premium would likely boost the perceived value of BOOM, we will want to carefully evaluate the investor in this situation. Nonetheless, a transaction of this sort would ultimately leave us substantially at the status quo.

If SNPE was to stumble across an investor that wanted both the SNPE shares and all of our shares, then we will have to go find a nice vacation spot where we can spend some of our gains.

If you look at SNPE’s financials, you will see a company with flat to declining sales, negative net income, declining cash flow and a deteriorating balance sheet. The sale of DMC is likely an effort to improve its balance sheet and return focus back to its core chemical business.

If you want an example of a similar transaction, take a look at AIZ. On January 21, 2005, a company called Fortis had an offering for more than 27 million shares that it owned in AIZ. Shares of AIZ closed at $30.6 on January 20, 2005. After the transaction, shares of AIZ trended higher and now trade above $45/share. That would be about 50% in less than a year. While the increase in share price at AIZ has likely been influenced by other factors, I think it is safe to say that the offering by Fortis did not impact the stock price negatively.